Period 2 Quiz
Darya McNeil owns and operates Darya’s Day Spa. She has decided to sell the business and retire. She has had discussions with a representative from a regional chain of day spas. The discussions are at the complex stage of agreeing on a price. Among the important factors have been the financial statements of the business. Each year they develop a statement of profits on a cash basis; no balance sheet was prepared. Darya provided the other company with the following statement for 2018:
| Darya’s Day Spa Income Statement for 2018 | ||
| Spa Fees Collected | $1,215,000 | |
| Expenses paid: | ||
| Rent for Office Space | $130,000 | |
| Utility Expense | 43,600 | |
| Telephone Expense | 12,200 | |
| Salaries Expense | 532,000 | |
| Supplies Expense | 61,900 | |
| Miscellaneous Expenses | 12,400 | |
| Total Expenses | 792,100 | |
| Profit for 2018 | $422,900 |
You have been asked to examine the financial figures for 2018. The other company’s representative said, “I question the figures because, among other things, they appear to be on a 100 percent cash basis.” Your investigations revealed the following additional data at December 31, 2018.
- Of the $1,215,000 in total spa fees collected in 2018, $142,000 was for services performed in 2017.
- At the end of 2018, spa fees of $89,000 for services performed during the year were on account and should be collected in 2019.
- Office equipment owned and used by Darya cost $205,000. Depreciation was estimated at $20,500 annually.
- A count of supplies on December 31, 2018, reflected $5,200 worth of items purchased during the year that were still on hand. Also, the records for 2017 indicated that the supplies on hand at the end of 2017 were $3,125.
- At the end of 2018, the secretary whose salary is $4,000 per month had not been paid for December because of a long trip that extended into January, 2019.
- The December 2018 telephone bill for $1,400 has not been recorded or paid. In addition, the $12,200 amount on the statement of profits includes payment of the December 2017 bill of $1,800 in January 2018.
- The $130,000 office rent paid was for 13 months (it included the rent for January 2019).
Required
- Complete journal entries for a – g above.
- Prepare a corrected income statement for 2018 (ignore income taxes).
- Write a memo highlighting important items that should be considered in the pricing decision.